Banks Race to Fund Internet Bubble 2.0

With the industry leaders firmly on board, other banks are sure to follow.

Following reports that JPMorgan Chase ( JPM) has joined Goldman Sachs ( GS) in pitching social media investments to rich investors, it is a safe bet other Wall Street institutions will soon be falling all over themselves to copy the industry leaders.

And though Wall Street may just be getting started in pitching the latest hot Internet investments to clients, not a few veterans in the sector believe it has already gotten ahead of itself.

"The fear on the part of JPMorgan and Goldman is that someone else will supply it and start to roll up that relationship and take existing business away," says Michael Lipper, whose firm, Lipper Advisory Services, provides money management services for wealthy families, retirement plans and charitable organizations.

But offering these investments to clients is hardly without pitfalls. Take, for example, Goldman's agreement with Facebook to buy a stake in the private company and dole it out to wealth management customers. The deal was initially seen as a huge coup for the investment bank, though it later had to cancel the stake sale in the U.S. due to concerns regulators might determine Goldman had actively marketed the offering, which was supposed to be private, in violation of securities laws.

Probably more significant for those trying to gauge whether Internet companies are overvalued were a couple of followup reports suggesting Goldman's hot new Facebook opportunity might be a bit colder and a bit older than originally advertised.

First, The New York Times reported that Goldman's private equity unit had already passed on the chance to invest in Facebook.

Adding to signs Facebook's valuation had climbed too far too fast, Bloombergreported that the opportunity had already been shopped around to other clients, such as Netscape founder Jim Clark, on better terms than the ones Goldman was offering.

Other concerns voiced to TheStreet by an investment banker who runs his own boutique firm are that many new Web-focused companies like Facebook, Twitter, Groupon and others don't need cash to expand. As a result, the banker says, the excess cash gets funneled to the companies' principals.